1. Field of the Invention
This invention relates to systems, methods and computer program products managing executions costs. More particularly, the invention relates to systems, methods and computer program products for creating and implementing mathematical/econometric models that provide pre-trade estimates of the price impact costs of a given order to trade a number of shares of one or more tradable assets, such as securities, as well as optimization techniques utilizing the cost estimates.
2. Background of the Related Art
Investment performance reflects both the investment strategy of the portfolio manager and the execution costs incurred while implementing the objectives of the investment strategy. Execution costs can be large, especially when compared to gross returns, and thus can affect performance significantly. Managing execution costs can make or break the success of a particular investment strategy. For institutional traders who trade large volumes, implicit costs, most importantly the price impact of trading, typically represent a significant portion of total execution costs. See, for example, Domowitz, Glen, and Madhavan (2002) for various definitions of costs along with discussions and analyses.
The importance of accurately measuring execution costs has grown in recent years due to fragmented liquidity in today's equity markets, algorithmic trading, direct market access, and structural and regulatory changes such as decimalization (implemented in 2001) and Reg NMS (implemented in 2007). Moreover, the recent demand of some legislators and fund share holder advocates for better disclosure of commissions and other execution costs increases their importance even further (see, for example, Teitelbaum (2003)). This makes the management of execution costs an important issue for institutional investors whose trades are large relative to average daily volume.
Thus, there is a continued need for new and improved systems and methods for estimating transaction costs.